Can I File Bankruptcy on My Negative Bank Account?

It is possible to file for bankruptcy on a negative bank account, but that's a high price to pay just because you're indebted to your bank for a few hundred dollars because of overdrafts. Theoretically, a person could owe a bank more than that for overdrafts. However, even if the amount is a few thousand dollars, the debtor should think twice about filing for bankruptcy for that reason alone. Others may file for bankruptcy if their bank account is showing a large negative balance because of bank garnishment for an unpaid debt.

Considerations

A negative bank account is a debt. Federal bankruptcy laws require people filing for bankruptcy to include all debts in the bankruptcy petition -- even a $25 overdraft. Filing for bankruptcy after a negative bank account makes more sense when the debtor is also struggling with excessive debt overall.

Garnishment

Garnishment allows a debt collector to freeze a debtor's bank account and freely withdraw funds. The debt collector removes money from the account electronically, in a lump sum or installments. The action is possible after the debt collector wins a monetary judgment in court. If the defendant does not pay the judgment the judge may allow garnishment for the full amount due.

Effects

Federal and state laws force banks to comply with garnishment, and they usually do not notify debtors about the action until it it begins. The debtor may tap into his account online and see a huge negative balance. The negative balance may represent a bank hold on the account representing the entire amount due from the judgment. That means someone losing a $15,000 credit card lawsuit could see a negative balance of $15,000 on his account because of garnishment.

Process

In most cases the garnishment order -- and the negative account balance -- remains in place until the debtor pays off the judgment either directly to the debt collector or by continuing to deposit money into the bank account.

Solutions

Some people elect to stop garnishment through bankruptcy. Filing for bankruptcy immediately ends all debt collection efforts while the debtor's finances are under review by the court. A special provision in bankruptcy called "the automatic stay" forces banks to stop garnishment, forcing an end to any negative balance caused by the debt collector. Some debtors feel they have no choice but to file for bankruptcy because of garnishment and other excessive debt. However, bankruptcy remains on credit reports for 10 years, and debtors should consider it only if there is no other option for resolving negative account balances or other debt.